Summary
In this paper, we use empirical analysis to analyze company characteristics associated with the adoption and maintenance of broad-based stock option plans. First, a cross-sectional analysis evaluates what company characteristics are now associated with these plans. Second, a longitudinal analysis examines the company characteristics that predict the adoption of such plans. Overall, our results provide support to the claim that higher monitoring costs prompt firms to adopt and maintain employee stock option plans. Firms with higher levels of business risk are less likely to shift some of that risk to employees through stock-based compensation, whereas firm with higher variability in total shareholder returns are more likely to adopt broad-based employee stock options. Nonunion firms are more likely to adopt and maintain such plans, and financial constraints do not appear to be driving the adoption decision.
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